Homework 9

Economics 470/570
Winter 2005
Review Question Set for Week #9

Definitions

Policy ineffectiveness proposition

Rational expectations

Natural rate hypothesis

Activist/non-activist

Data lag

Recognition lag

Legislative lag

Implementation lag

Effectiveness lag

Short Answer

1. Derive the SRAS and LRAS curves for the New Classical model.

2. How does the New Classical model differ from the traditional Keynesian model?

 

Essay

1. Explain the activist and non-activist positions on the use of government policy to stabilize macroeconomic variables such as real output. What problems are encountered in the pursuit of activist policies? Are there substantial differences for monetary and fiscal policy?

2. Derive the short-run and long-run Phillip's curves from the fixed wage AD-AS model. Explain why the short-run Phillip’s curve shifts when inflationary expectations change.

3. Use the Phillip’s curve to explain why credibility of the monetary authority is important for fighting inflation.

4. Explain why only unexpected changes in policy can affect real output in the short-run and neither expected nor unexpected money can affect real output in the long-run in the New Classical model.